California Resources Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. CRC is a California-focused oil and natural gas exploration and production company. The financial statements are pre-emergence and reflect debtor-in-possession reporting under Chapter 11. CRC emerged from bankruptcy on October 27, 2020, after quarter-end.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $409 million | $681 million | $1.258 billion | $2.024 billion |
| Operating income (loss) | $(13) million | $148 million | $(1.777) billion | $327 million |
| Net income (loss) | $(7) million | $127 million | $(1.999) billion | $124 million |
| Net income (loss) attributable to common stock | $(29) million | $94 million | $(2.096) billion | $39 million |
| Adjusted EBITDAX (non-GAAP) | $103 million | $278 million | $373 million | $834 million |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $141 million | $540 million |
Q3 GAAP net loss attributable to common stock was $(29) million, while reported EPS was $2.20. The filing explains that EPS includes a $138 million deemed-return adjustment related to the Ares JV settlement; the per-share figure therefore does not track the GAAP common-stock loss in the ordinary way. Adjusted net loss was $(55) million in Q3 and $(265) million for the nine months, both non-GAAP measures.
- Revenue and production: Q3 oil and gas sales fell 42% to $312 million. Average net production declined 17% year over year to 106 MBoe/d; nine-month production fell 13% to 113 MBoe/d.
- Prices: Q3 average Brent was $43.37/bbl versus $62.00; realized oil price including settled hedges was $42.15/bbl versus $68.41. Q3 realized gas price including hedges was $2.24/Mcf versus $2.72.
- Costs and margins: Q3 production costs fell 36% to $141 million, and production cost per Boe declined to $14.52 from $18.82. These savings did not offset lower prices and volumes: operating income of $148 million a year earlier became a $13 million operating loss.
- Impairment and unusual items: CRC recorded a $1.736 billion first-quarter asset impairment, principally on proved oil and gas properties, contributing to the nine-month loss. Q3 included a $66 million net reorganization gain, primarily from writing off debt-related deferred balances, partly offset by bankruptcy-related fees. Other notable items included a $10 million workforce-reduction charge and a $20 million pipeline-contract deficiency payment in April.
Cash, debt and liquidity
- At September 30, cash was $122 million, including $24 million restricted; current assets were $420 million and current liabilities $1.194 billion.
- CRC reported $733 million of debtor-in-possession financing and $4.516 billion of liabilities subject to compromise. Management described total outstanding debt at September 30 as approximately $5.1 billion, including pre-petition obligations and DIP financing. The pre-petition debt’s estimated fair value was approximately $500 million versus a $4.4 billion carrying amount.
- Nine-month operating cash flow was $141 million, down from $540 million. Investing activities used $28 million, including $37 million of capital investment, partly offset by $41 million of asset-sale proceeds. Cash increased by $105 million to $122 million.
- At emergence, CRC reported $350 million of liquidity: $72 million unrestricted cash and approximately $278 million available under its new revolving facility. Post-emergence debt included $225 million drawn on the $540 million revolving facility, a $200 million second-lien term loan and $300 million of EHP Notes. CRC estimated post-emergence cash interest at approximately $50 million annually and minimum distributions to the BSP JV at approximately $18 million annually.
Material changes, outlook and risks
- Chapter 11 restructuring: CRC filed for Chapter 11 on July 15, 2020 and emerged October 27. Approximately $4.4 billion of pre-petition debt was exchanged for new equity and warrants; old equity was cancelled without recovery. CRC issued 83.3 million new shares, with warrants covering up to 5% of post-emergence shares. Fresh-start accounting is expected to make successor financial statements not comparable with pre-emergence results; the fair-value process was ongoing at filing.
- Capital and operations: CRC cut internally funded capital investment to maintenance levels, reporting $37 million for the first nine months and expecting about $10 million more through year-end. It suspended internally funded drilling and most capital workovers. Management said production could continue to decline at a moderate pace; the base decline was described as low to mid-teens, with a gradual return toward that rate as well repair work increases. No formal forward earnings or production guidance is provided.
- Cost actions and joint ventures: Management said the Q3 operating-expense run rate was below $50 million per month, versus $64 million in Q1. Headcount fell from 1,250 to approximately 1,100. Alpine suspended its development funding in March, with funding not restarted by September 30. At emergence, CRC acquired the Ares JV interests held by ECR, issuing $300 million of EHP Notes, shares and $2.5 million cash.
- Commodity, pandemic and regulatory exposure: Management cited COVID-19 demand weakness, volatile oil prices and OPEC/Russia supply decisions as major uncertainties. Lower prices, curtailed investment and shut-ins could further reduce production, reserves, cash flow and asset values. New California measures—including Ventura County development restrictions and the state’s executive orders on petroleum and emissions—could constrain operations and demand; CRC and others challenged the Ventura County measures in court.
- Financing constraints: Post-emergence facilities impose leverage and current-ratio covenants, borrowing-base redeterminations, substantial oil-hedging requirements and restrictions on additional debt, asset sales and dividends. CRC said liquidity requirements could apply if specified liquidity and financing thresholds are not met. The company also identified risks from its recent bankruptcy, limited trading history, potential share dilution, and dependence on access to capital.
- Contingencies and controls: CRC said accrued legal and other claims were not material and reasonably possible losses above reserves were not expected to be material. Management concluded disclosure controls were effective as of September 30, 2020.
Key facts investors should verify
- How fresh-start accounting changes the valuation of assets, liabilities, equity and future reported earnings, and how successor results compare with pre-emergence periods.
- Actual post-emergence liquidity, revolving-facility availability and compliance with borrowing-base, leverage, current-ratio and minimum-liquidity tests.
- Whether production stabilizes as capital spending and well-repair activity recover, and the effect of continued low prices on reserves and cash generation.
- Hedge coverage, realized hedge settlements and the trade-off between downside protection and limits on participation in higher prices.
- The operational and financial effects of California and local regulatory changes, including the outcome of litigation challenging Ventura County restrictions.
- The final share count, warrant dilution, ownership concentration and terms or restrictions affecting the new capital structure.